Proving Appraisal Adjustments

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Proving Appraisal Adjustments

When I began appraising, I asked my mentor what adjustments to use- he said, “Figure it out for yourself.” So I did. Here’s what I learned.

When my mentor left the office, I studied his appraisals and began using his adjustments. Many years later, I wonder how many appraisers are using hand-me-down adjustments, a list picked up from somewhere or another, or those suggested by a client?

Let’s be honest:(1) How many appraisers have a set of adjustments that seem to work – that they might have used for years but have never tested?

(2) How often do we guess at an adjustment either because we do not know how to determine the adjustment or just don’t want (or have the time) to do the research and analysis?

(3) How often do appraisers, challenged on an adjustment and unable to defend it, bend to unreasonable requests?

It is possible to do an appraisal without adjusting but we have found by adjusting we can narrow the range of indicated values from the comparables. However, if our adjustments are wrong, we might find we are not narrowing the range but actually making it wider. I find that lot size and/or age adjustments might not be helpful because the market does not always account for those numeric differences.

Using Your Comparables to Determine Adjustments

SUBJECT

Comp 1

Comp 2

Comp 3

Sales Price

$160,000

$171,000

$189,000

Year Built

1985

1984

1986

1985

Square Footage

1,600

1,600

1,800

1,800

Pool

YES

No

No

YES

Looking at the data we would expect the subject to have more value than comp 1 but less than comp 3. You can subtract the sales price of comp 1 from comp 2 to determine a square footage adjustment. You can subtract the sales price of comp 2 from comp 3 to determine a contributory value for a pool.

The more variables you have, the more comparables you may need to account for each difference but what do you do with a difference you cannot find in any of your comparables (such as a view)?

Using Paired Sales to Determine AdjustmentsSubject is a 1,600 square foot house with a view but there are no sales in the past year of similar size homes with comparable views. However, there are four sales of the same plan without views in the past 120 days – ranging in sales price from $200,000 to $225,000. So first we would expect the subject property to have a value in excess of $200,000.

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There is a 1,000 square foot house with a comparable view – that sold for $165,000 and a model match without a view that sold for $140,000 – for a difference of: $25,000. Now it looks like the contributory value of a comparable view might be $25,000 but that is for a smaller house.

There are two sales of a 2,000 square foot plan with views for $250,000 and $260,000 and model matches without the view for $220,000 and $230,000. So the range here is: $20,000 to $40,000 (average at: $30,000).

Using History and Percentages to Determine Adjustments
As a second test you find the subject property sold two years ago for $184,000 and model matches without the view were selling for $160,000 – now that difference is $24,000 (15 percent). So determining 15 percent of the two current model match sales at $200,000 and $225,000 will result in a possible view value range of $30,000 to $33,750.

Conclusion for the View Adjustment DeterminationSmaller homes with and without the view indicated a $25,000 premium for the view. Larger homes (on average) pull up to $40,000 more for the view (average at $30,000). Prior sales of subject with the view and comparables without the view found the view added 15 percent to value – which applied to the non-view current comparables equals a value for the view from about $30,000 to $34,000. View value adjustment of $32,000 is chosen.

Using Sale/Re-sale of the Same Property to Determine AdjustmentsCondition Adjustment

Subject sold for $100,000 on January 1, 2000 as an REO in fair condition.

Re-sold for $140,000 on April 1, 2000 after a $20,000 rehab (in a stable market).

From that information we can conclude a condition adjustment of $40,000 – for nothing else has changed.

Time Adjustment

Subject sold for $100,000 on January 1, 2000.

Sold again on January 1, 2002 for $140,000, which equals $40,000 in 24 months or +$1,666 per month.

Now you can take that $1,666 per month to current comparables to account for appreciation. Many appraisers are doing time adjustments wrong – by using the close of escrow date. Here is a quote from Fannie Mae: “Time adjustments must be representative of the market and supported by comparable sales or other market evidence. The adjustment must reflect the time that elapsed between the contract dates (the date of the meetings of the minds) for the comparable sales and the effective date of the appraisal for the subject property.”

Data shows the median home prices in the county were going down between January and April but started moving up in May. The city home prices hit bottom in March and began moving up in April but are still below the median from January. The monthly increase from June to July for the County is $6,000 and $5,000 for the city. The appraiser could choose a time adjustment of $140 per day applied to the contract (meeting of the minds) dates of the comparable sales.

When we look for comparables to put into an appraisal report, we filter down to the properties that are the most similar, most recent and near-by. Sometimes the initial search is too narrow and only one or two comps are found, other times the search results in too many potential comparables and the appraiser will filter down to get to a reasonable number to produce a credible report. Some appraisers try not to use more than three comparables; other appraisers strive to always have more than three comparables. I believe if the appraiser is trying to manipulate a value it is easier to do it with only three comparables.

Here is a list of actual sales in a neighborhood – what can we learn from this information?

From the chart we learn that house size is NOT the only variable to sales price. There are 7 sets of model matches – what can be learned from them?

Set 1: Sale # 16 sold for $175,000; Sale # 28 sold for $189,000; a difference of:$14,000

Set 2: Sale #4 sold for $157,000; Sale #11 sold for $170,000; a difference of: $13,000

Set 3: Sale # 19 sold for $177,000; Sale # 26 sold for $185,000; a difference of: $8,000

Set 4: Sale #21 sold for $180,000; Sale #29 sold for $190,000; a difference of: $10,000

Set 5: Sale #20 sold for $169,800; Sale # 22 sold for $183,000; a difference of: $13,200

Set 6: Sale # 6 sold for $158,000; Sale #25 sold for $185,000; a difference of: $27,000

Set 7: Sale #24 sold for $185,000; Sale # 35 sold for $212,000; a difference of: $27,000

Things we might learn from the Mass Data sales

We have information to fill out in the neighborhood section of the appraisal.

We know more homes are selling above the list price than below it.

We know larger houses on average are selling for less per square foot than smaller houses.

We know most of the homes sold were distress sales (REOs and Short Sales).

We know the REO properties typically sold in less than one month; standard sales often took slightly over one month and short sales often took over three months to sell.

We know the standard sales often pull the highest prices.

We know lot size does affect the sales price but might be overshadowed by such things as type of sale.

Things we might learn from the model match sales

Set 1: Condition and type of sale affects value: Sale # 28 was a Standard Sale (per MLS) with new interior paint, new carpet, new appliances, upgraded kitchen counters and a view; selling in a fast nine days; Sale # 16 was a short sale (sold vacant) with a sunroom addition, selling almost two months later for $14,000 less, taking 120 days longer.

Set 2:Sale #11 was an REO sold “as is” in December for $15,000 over the list price; Sale #4 sold for $7,000 over the list price but $13,000 less than the model match Sale #11, in November, as a short sale and per MLS it was “beautiful” but had a smaller lot. So the higher price went to the REO (over the short sale), with the larger lot, but in (possibly) inferior condition and the more recent sale (maybe some appreciation involved here). Interesting that both of these houses also sold in 2005 (July for #4 and October for #11).

Number 11 with the larger lot sold for $356,000, # 4 sold for $340,000, needing fresh paint and carpet – which is a $16,000 difference. What was the affect of condition, time (prices were moving up), and lot size with those two sales. In my opinion, lot size was not as big of a factor in home sales in 2005 versus now.

Set 3: Sale # 19 was an REO that sold in only three days for cash at $7,100 above the list price in December; Sale #26 was also an REO selling in 10 days, a month earlier, again over the list price – for only $8,000 more. This pairing might tell us about the furry of buyers, causing homes to sell fast and over the list price.

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Set 4: Again two model match REO sales – both selling in December, both over the list price – for a difference of $10,000. Both had pools. Sale # 29 that sold for more had a slightly larger lot. Sale #21 had a prior sale three and a half years ago for $434,000, giving an indication of how much prices have dropped.

Set 5: Two REO model match homes, on equal size lots, selling in January, both for cash with a difference in price of $13,200. The one (#20) that sold for less “needs TLC” as per MLS.

Set 6: Here we have a big difference in sales prices: $27,000. Both were REOs. The lower sale closed in November, the higher sale in December, they were on the market similar number of days. MLS comments on the lower sale (Sale #6) “needs some repairs that may restrict FHA offers.” This property was previously listed for sale as a short sale for 197 days – ending at $160,000 per MLS, then selling for $169,000 as an REO. Sale # 6 also (see Sale #21) had a prior sale three years and seven months back for $435,000, highlighting how much prices have dropped.

Set 7: Another $27,000 difference, the low sale (#24) was an REO, going FHA in November. The higher sale (#35) was a standard sale, with new paint, carpet, flooring, granite kitchen counters, appliances and A/C, across the street from the club house. It had a prior cash sale as an REO three months before and per MLS at that time reported to need some cosmetic repairs for $160,000. Sale #35 sold for $160,000 and again after rehab, three months later, for $212,000 (an increase of $52,000). And the model match Sale #24 sold for $185,000: could these pairing be a reflection of the value for condition?

Sale #35 Prior as an REO

Sale #24

Sale #35 after a rehab

$160,000

$185,000

$212,000

Determining Adjustments from Mass Data
We can gather indications of trends and adjustments from the neighborhood sales data. “Paired sales” analysis is useful when dealing with one variable. Sale/re-sale of a specific property is very valuable find, which is an excellent way to determine value changes over time and/or the value of condition. It is also possible to change the perimeters of the mass data search to actually determine other dollar adjustments.

By restricting the neighborhood search to homes in a small square footage range, we will find good comparables for the report but possibly inadequate sales numbers to establish valuation differences or changes. If we expand the search in time, we will increase the number of sales but increasing or decreasing prices may distort the results but does provide sales data for the top of page two of the URAR.

If we expand the search in distance and compare the “median” sale prices, we actually can pull the true market reaction to such variables as value changes over time (time adjustment) and the differences in value per square foot. This expansion and refinement of the MC form into an adjustment matrix can also be used to determine market extracted adjustments for bedroom/bath count, distress versus standard sales, etc.

Appraiser Adjustment Matrix

Square Footage

0-3 Months

4-6 Months

Difference

2800-3000

$220,000

$225,000

$-5000

2600-2800

$225,000

$211,000

$14,000

Difference

$-5000

$14,000

//////////////////

2400-2600

$218,000

$200,000

$18,000

Difference

$7000

$11,000

//////////////////

2200-2400

$185,000

$186,000

$-1000

Difference

$33,000

$14,000

//////////////////

2000-2200

$175,900

$170,000

$5900

Difference

$9100

$16,000

//////////////////

1800-2000

$159,000

$160,000

$-1000

Difference

$16,900

$10,000

//////////////////

1600-1800

$151,000

$140,000

$11,000

Difference

$8000

$20,000

//////////////////

1400-1600

$132,000

$125,000

$7000

Difference

$19,000

$15,000

//////////////////

1200-1400

$120,000

$110,500

$9500

difference

$12,000

$14,500

//////////////////

Difference TOTAL

$100,000

$114,500

$58,400

Divide by 8

$12,500

$14,312

//////////////////

Divide by 9

//////////////////

/////////////////

$6488.88

Divide by 200 sq’

= $ per Sq’ $62.50

= $ per Sq’ $71.56

//////////////////

Divide by 90 days

//////////////////

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= $ per day $72

Data used is median sales prices often for a full city, for both current to three months and four to six months by house size ranges. In the gray boxes is the difference between the two median prices from adjacent ranges. For example the median price of $132,000 for homes between 1,400-1,600 square feet is subtracted from the $151,000 median sales price of home between 1,600/1,800 square feet– resulting in a difference of $19,000. When all the square footage differences are added, averaged and divided by 200 square feet – the result is the difference in actual prices per square foot for two different time periods. The last difference column will result in a market extracted time adjustment per day (average).

First it is important to use a large data pull, a full city or a combo of cites and be very careful not to add other filters (such as age of homes or lot sizes). For I find the raw data tends to work best because we are working with median prices (never average prices), which by nature tends to defuse the outliners.

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Knowledge Obtained From New Home Sales

You can compare the base prices of different models in a development to extract a square foot adjustment.

By looking at the map of sales, you might be able to see what models have the most buyer appeal.

You might be able to determine what they are getting for extra features, such as an additional garage space.

You might note advertisements of “concessions” being offered, such as discounted interest rates, added upgrades at no extra cost or free things included with a purchase (big screen TV or a trip for example).

If you track the base prices over time, you have a possible pattern of appreciation or depreciation.

Signs of new construction or the stoppage of construction can be an early indication of changes in the marketplace.

You can do a cost approach against the base prices to extract a land value.

If you walk around the models, listen to what people are saying and you may learn other interesting stuff.

Knowledge from Real Estate Agents
The real advantage agents have over appraisers is that they deal with real people, while we work with data. And they are on the front lines of the market and can see trends we might not notice for months.

One great way to have some one-on-one conversation time with real estate agents is to visit open houses on the weekends or visit the new home sales offices during the week and talk to the agent on duty. I generally go to MLS meetings and have a good group of agents who will talk to me about what is going on in their areas.

Agents can tell you about challenges they are having – such as no inventory or the difficulty getting REO or short sale offers accepted. You might hear of up bidding and multiple offers from agents. Sometimes they will express reasons why a particular home is not selling and it is not always about “price.”

Using Cost Analysis in Adjustment Determinations
For a Unique Feature with No Comparables
If you can find out the actual cost (or use a cost service) of a unique property feature, you have a starting point in determining a contributory value of that feature, improvement, etc. And you have information to put into the appraisal, which is always superior to throwing in an adjustment with no explanation, and far superior to ignoring something that might add value.

Certainly costs do not equal value but one can make a case that the added cost of a unique feature to a small segment of buyers might approach the actual amount they may be willing to pay extra for the property. But most times the value added will be less than the actual costs. Once the appraiser has decided a feature has buyer appeal, the appraiser can work with a number somewhere between 0 and the estimated costs. With energy efficient items I think energy savings – per year or month – could also be considered in the estimate of contributory value.

For When Comparables and the Subject are not of the Same Quality
If you calculate the new costs per square foot of the subject property against the cost per square foot new of the superior or inferior quality comparables (discounting if you need to) – you will have some basis for a hard to determine quality of construction adjustment. I have even used this technique when I had to use site built against manufactured homes in an appraisal.

For When the Subject Lacks Something Buyers Expect
Let’s say you are appraising a house without a kitchen; you could figure out the approximate cost to build an adequate kitchen in the appropriate location. Now this is the opposite of a feature that might be nice but not needed; for here the adjustment would probably be more than the actual costs (instead of discounted costs).

In conclusion
Every now and then you need to think outside the box. Try to strive for techniques that seem reasonable, possibly a way a potential buyer might look at the issue. And be sure to explain what you did and why in the appraisal.

Do you have the proper support for your adjustments? Stop taking the same old CE courses and learn proven adjustment methods with instructor Richard Hagar, SRA. Fannie Mae states that the number one reason appraisals are flagged is the “use of adjustments that do not reflect market reaction.” Stay out of trouble with Fannie Mae, your state board and your AMC/lender clients with solid, supportable adjustments. Learning how to make defensible adjustments is the first step in becoming a “Tier One” appraiser, who earns more and enjoys the best assignments. Up your game, avoid time-consuming callbacks and earn approved CE today!